India: Slowing Economy Could Stress The Banking System (Guest Post)

By Nisha Sharma

Several news reports are speculating that the bustling and red-hot economy of India may be decelerating. Depending on the macroeconomic point of view, India's economy could either be slowing down or screeching to a halt. The writing is on the wall for some observers, while others are more cautious in their analysis.

India's economy was once seen as a shining example of what good education, hard work and a sound sovereign monetary policy can do for a nation's development and for the welfare of the citizenry. The economic growth rate has been impressive: India's Gross Domestic Product (GDP), which is now just under 8%, was below 5% at the beginning of the 21st century. India proudly became the "I" of the BRIC nations, that famed group of countries -Brazil, Russia, India, and China- for which unbridled economic output became their rallying cry.

There is a popular belief that India's economic success can be attributed to its lucrative business outsourcing contracts. While it is estimated that 23% of the workforce is currently engaged in the growing Information Technology and service sectors, India's growth is also due in great part to their agricultural, energy, manufacturing, and financial output.

Current signs of the economic slackening in India have been widely reported by the world's financial news outlets. A sudden chill was felt in the automotive sector in October, as sales of passenger cars dropped by more than 20%, and manufacturing slowed down by more than 25% in the same month. The last time such anaemic car buying was witnessed was in December of 2000, mostly as a consequence of the dot-com bubble. The rate of exports has been cooling down as well, even though it has still managed to grow by 10.8 % since last year. Other countries would go to war for such a healthy rate of exports, but it is important to put into context that the Indian economy was getting used to export rates as high as 82 % in July.

The most obvious sign that India may be in the midst of a slump comes courtesy of Moody's Investor Service, the prestigious -yet often maligned and controversial- credit ratings agency. Moody's has changed its outlook on India's banking system to negative. As part of its rationale, Moody's analysts have expressed concern over the vertiginous loss in the value of banking stocks. According to Moody's, the slowing economy may trigger a string of loan delinquencies and defaults. Reuters reported on Nov. 11 that the Indian central bank will keep a watch on the liquidity situation to decide on open market operations.